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Life Insurance

What Is a Life Insurance Policy Lapse?

Failing to make your premium payments on time can lead to a life insurance policy lapse. When this happens, your beneficiaries may miss out on receiving your policy’s death benefit, potentially creating financial instability upon your death. The following guide explains how life insurance policy lapses work so you can ensure your family has the financial protection they need.

Life Insurance Policy Lapse 1

The death benefit provided by a life insurance policy can help secure your family’s financial future when you pass away. In 2022, 68% of people with life insurance coverage said they believed their family would be financially secure if the primary wage earner suddenly passed away. However, if your life insurance policy lapses, you lose coverage, and the insurance carrier does not pay a death benefit. This leaves your beneficiaries with a financial shortage after your death.

Taking the time to learn what causes a life insurance policy lapse can help ensure your beneficiaries receive the financial protection you took the time to purchase. The following guide details how policy lapses work, tips for avoiding them, and possible options for reinstating a lapsed policy. 

What Is a Lapse in Life Insurance?  

A life insurance policy lapse occurs when the policy owner stops making premium payments or when a term policy ends and is not renewed. When a policy lapses, the insurance carrier is no longer obligated to pay the death benefit to your beneficiaries.

Many situations can cause you to miss a premium payment inadvertently. For example, you may have moved and forgotten to change your address or changed banks and failed to update the information with your insurance carrier. However, it’s essential to take steps to avoid this and, if it happens, to take care of it right away. 

If you wait too long to reconcile the situation, you will have a lapse in life insurance coverage. This can result in losing the premiums you’ve already paid and no longer having life insurance coverage. Depending on your current medical situation, you may find that you no longer qualify for a new life insurance policy or that a new policy is significantly more expensive than the policy you lapsed.  

Whole Life Insurance Policy Lapses  

A whole life insurance policy is a type of permanent life insurance that typically provides your lifetime coverage as long as you make the required payments. If you do not pay your premiums when they are due, your policy may lapse, and your coverage eventually ends. However, since whole-life policies typically have a cash value, they provide some leniency in the form of extra time. 

If you have enough cash value built up in your policy, the carrier can use an automatic premium loan to access the funds and use them to pay your premium payments. This typically happens without any action from you, although you could instruct the carrier not to use your cash value for premium payments. Once the cash value has been used, the policy is considered lapsed, and coverage ceases. If your policy has a surrender period and you are still within that timeframe (typically ten years), you may also have to pay the insurance company a surrender penalty.

Term Life Insurance Policy Lapses  

Since term life policies do not have a cash value, once a premium payment is missed, the policy immediately goes into a grace period. The policy lapses if the premium is not paid before the grace period ends. In this case, coverage ceases, and you do not receive a refund for any of the premiums you have paid over the years.

A term life insurance policy can also lapse if you decide not to renew it after the original term has passed. For example, if you purchase a ten-year term policy and do not take action, your coverage may lapse the day after the ten years has ended. 

Does Every Life Insurance Policy Have a Grace Period?  

Each state requires life insurance carriers to offer a grace period before a policy lapses. The minimum required grace period can vary from state to state, and some policies may offer a grace period longer than the state’s minimum. However, the typical grace period is 30 or 31 days. During this time, the insurer provides coverage and pays a death benefit if the insured dies.

Some policies allow you to reinstate your coverage without owing any additional interest if you make your payment before the grace period ends. If the outstanding premiums are not paid before the grace period is over, the policy lapses, coverage ends, and the insurer does not pay the death benefit to your beneficiaries. 

How and Why to Reinstate a Lapsed Policy  

Reinstating a life insurance policy may be as simple as submitting a payment for the unpaid premium within the policy’s time constraints. Once a policy is reinstated, coverage resumes.

While many life insurance policies allow for reinstatement, it is not a legal right. The option to reinstate may vary depending on the insurance company’s policies. Many companies allow you to reinstate a policy for up to 5 years, but the faster you attempt to reconcile the issue and reinstate a policy, the fewer hoops you may need to jump through.

Reinstating your policy within 30 days or less from the end of the grace period is typically easy. In this case, you may be able to call the insurer, complete a reinstatement application, and catch up on your missed payments. Once this is done, the policy is reinstated.

If you wait between 30 days and six months, you may need to answer some health questions and sign a statement confirming that no material or health changes have occurred since the original policy was issued. Failing to be honest when completing this step could lead to a future claim denial, so disclosing any new health issues is critical.

Options for reinstatement between 90 days and five years can vary greatly depending on the insurance carrier. In this case, you need to reach out to your carrier to determine whether you can reinstate the policy and the required process. Some insurance carriers may require you to go through full underwriting again and may also require a new contestability period.

When reinstating a policy, you need to pay your back premiums, and there may also be additional fees and penalties. While this could be a significant amount of money, it still may be less expensive than purchasing a new policy. Since policies are priced based on your current age, life insurance costs may increase dramatically as you age. 

Will Life Insurance Beneficiaries Know If a Policy Has Lapsed?  

While insurers must notify an insured individual of a policy lapse, there is no obligation to contact a policy’s beneficiaries. Typically, a beneficiary doesn’t find out that a policy has lapsed until the insured has died and they try to make a claim. You may be able to reinstate a life insurance policy if you find out about the lapse before the insured dies. However, after they pass away, there are usually no further options.

How to Prevent a Lapse in Life Insurance

Avoiding a policy lapse in the first place can help ensure that you don’t have to deal with the hassle of reinstatement and that your family doesn’t lose the protection you’ve purchased. Here are a few easy ways to avoid a policy lapse.

  • Choose automatic payments: Allow the insurance carrier to deduct the premiums directly from your bank account, ensuring you don’t miss a payment. Make sure you choose an account you plan to keep open and that it has sufficient funds to cover the debit.
  • Provide address updates quickly: Keep your contact information up to date with your insurance carrier to ensure you don’t miss a bill for your premium payment.
  • Open correspondence from your insurance carrier right away: This could help you avoid missing a grace period notice, which may allow you to avoid a lapse or easily and inexpensively reinstate your policy.
  • Review your policy annually: Ensure you’re not paying for coverage you no longer need to avoid finding yourself unable to make your payments.
  • Set reminders for term policy expiration: Proactively decide whether to allow your policy to lapse, renew the policy, or purchase new coverage before your current coverage ends.  

If your policy does happen to lapse, contacting your insurer as soon as possible to reinstate it can save you significant time and money.